How is Inherited Property in New York Taxed When Sold

When selling an inherited property in New York, a variety of taxes must be considered, including transfer tax, property tax, estate tax, and capital gains tax. Among these, the capital gains tax is particularly significant due to the stepped-up basis that heirs or beneficiaries receive upon inheriting the property.

Transfer Tax

When property is sold in New York, it is the grantor's responsibility to pay the transfer tax. However, it is not uncommon for grantors to pass this cost to the grantee. There are two types of transfer taxes the grantor must pay: the local and state transfer taxes. As of 2024, the New York City transfer tax is 1% for properties below $500,000 and $1.425% for those $500,000 and up. The New York State transfer tax, on the other hand, is 0.4% for properties below $3,000,000 and $0.65% for those $3,000,000.00 and up.

Property Tax

Property tax is an annual levy imposed on property owners, calculated based on the assessed value of the property, which generally reflects a percentage of its fair market value. While not directly tied to the sale of the property, it is crucial to ensure that all property taxes are current and paid in full at least up to the date of sale before transferring ownership to the grantee. This standard practice helps to maintain a clear title and prevents any outstanding tax liabilities from being transferred to the new owner.

In New York, the average property tax rate stands at 1.73%, meaning an inherited property with an assessed value of $500,000 would incur an annual property tax of $8,650. However, it is important to note that property tax rates can fluctuate significantly depending on the specific location within New York, and the actual rate may vary from the state average. To obtain precise calculations, it is essential to use the tax rate specific to the location of the property in question.

Estate Tax

Estate tax is levied on the decedent's entire gross estate, which includes all assets owned at the time of death, rather than on a specific property. Before the property can be transferred from the deceased to the heirs or beneficiaries, any applicable estate taxes must be paid. In 2024, the federal estate tax exemption stands at $13,610,000, meaning estates valued at or below this threshold are not subject to federal estate tax. New York, however, has a significantly lower estate tax exclusion amount of $6,940,000. Consequently, an individual who passes away with a gross estate worth $7 million would be exempt from federal estate tax but would still be liable for New York estate tax.

Capital Gains Tax

When selling an inherited property, the IRS uses the stepped-up basis method to determine capital gains tax. Under this approach, the property's fair market value at the time of the decedent's passing, rather than the initial purchase price, forms the foundation for tax calculations. Capital gains tax is levied only on the appreciation in the property's value from the moment of inheritance to the point of sale. To illustrate, imagine a property originally acquired by the deceased for $250,000, assessed at $500,000 upon inheritance, and later sold for $600,000. In this case, capital gains tax would be applied exclusively to the $100,000 increase in value. This example demonstrates how heirs or beneficiaries gain an advantage from the stepped-up basis, as they are not required to pay capital gains tax on the property's value appreciation from $250,000 to $500,000.

Certain exemptions, such as the home sale exclusion, may allow individuals to exclude a portion of capital gains from taxation. As of 2023, the home sale exclusion allows up to $250,000 (for single filers) or $500,000 (for married couples filing jointly) of capital gains to be excluded if the property was used as the primary residence for at least two of the five years prior to sale.

Selling an inherited property in New York involves a complex interplay of various taxes, including transfer tax, property tax, estate tax, and capital gains tax. While transfer tax and property tax are directly related to the sale and ownership of the property, estate tax is determined by the total value of the decedent's gross estate. The stepped-up basis method used by the IRS for calculating capital gains tax provides a significant advantage to heirs and beneficiaries, as they are only liable for taxes on the property's appreciation from the time of inheritance to the point of sale. Understanding these tax implications is crucial for those inheriting and selling property in New York to ensure compliance with state and federal regulations and to make informed decisions regarding their inherited assets. Shoud you need assistance, we at the Law Offices of Albert Goodwin are here for you. We have offices in New York City, Brooklyn, NY and Queens, NY. You can call you can call us at Law Offices of Albert Goodwin, PLLC at 212-233-1233.